Share plunge presents undervalued opportunity for well-known ASX blue chip
Shares in this well-known ASX20 stock have tumbled in recent weeks, but is the market selloff overdone?
Shares in biotech behemoth CSL (CSL) have slipped more than 10% in recent weeks, but the market selloff may be missing the company’s longer-term prospects, according to one Morningstar analyst.
In an update to the market last month, the company said it now expects foreign currency headwinds in fiscal 2023 to be in the range of US$230 million to US$250 million, a jump from its previous guidance of around US$175 million. While the company maintained its constant currency profit guidance for FY23, it noted that the revised currency impact has skewed this figure to the top end of the range.
The company, which develops and manufactures plasma and non-plasma therapies through its Behring and Seqirus businesses, respectively, operates in more than 100 countries around the globe and, with a market cap of more than $120 billion, is the third largest ASX-listed company behind fellow market giants BHP (BHP) and Commonwealth Bank (CBA).
The news follows the appointment of new CEO Paul McKenzie, who took over from Paul Perreault following his decade-long stint in the top job.
In the days following the update, shares in CSL dropped as much as 10% and have continued to fall in the proceeding weeks, and is now down 7.91% YTD.
However, despite the selloff, Morningstar has held firm on its fair value estimate of the stock, which was raised to $315.00 per share back in October of last year.
With the fair value estimate holding steady, the recent market selloff has pushed shares in CSL further into “discount” territory, and CSL reached four-star, territory earlier this month.
This marks the first time this year that the well-known blue-chip has fallen back into the undervalued bracket, after a rally earlier this year kept it close to the revised fair value estimate.
Morningstar analyst Shane Ponraj says that the currency headwinds, along with a more difficult macro-economic environment, is likely to affect the company’s near-term margin recovery.
“Given inflationary pressures and assuming current currency rates, management indicated CSL Behring's gross margin is unlikely to return to prepandemic levels in the near term,” he says.
That said, while Morningstar considers these near-term headwinds impactful, Ponraj notes that the company’s longer-term recovery remains intact.
“Healthcare is somewhat defensive and generally able to pass on cost inflation without a material impact on demand,” he says.
“Although CSL recently provided disappointing guidance for fiscal 2024, we remain optimistic on long-term product demand. As plasma supply improves, we expect blood donor fees to fall and margins to expand with operating leverage, as labour and overhead costs scale with collection volumes.”
Looking forward, Morningstar estimates the gross margin for the company’s Behring plasma therapies business to recover to prepandemic levels by fiscal 2027.
“As plasma supply improves, we anticipate currently elevated donor compensation costs to normalise and drive margin expansion together with operating leverage, as labour and overhead costs scale with normalising collections and volumes," he says.
"With diagnosis rates also improving on increased social mobility, we remain optimistic on the long-term trajectory of Ig [immunoglobin] demand.” Ponraj says.
For investors interested in a broader view of the ASX healthcare sector, Morningstar recently outlined its three picks for the healthcare sector, alongside 30 other stock picks, in its most recent Outlook Report.